American and US Airways seal merger

Companies / 15 February 2013, 01:40am

Soyoung Kim and Karen Jacobs

A US Airways jet passes an American Airlines jet at Sky Harbour International Airport in Phoenix on Thursday. The merger of the two airlines has given birth to a mega airline with more passengers than any other in the world.

New York - AMR Corporation and US Airways Group on Thursday sealed an $11-billion merger, but before they can welcome their first passenger onboard they have to get regulators to sign off and then integrate a web of intricate systems.

Creating what will become the world's largest airline, with 6 700 daily passengers, will require AMR's American Airlines and US Airways to unite two workforces totalling 113 000 and meld together reservation and baggage handling systems, computer networks, and terminals - a process that has complicated other marriages in the airline industry.

“So far it's just been pushing paper,” said Robert Mann, head of R.W. Mann & Company of Port Washington, New York, which provides industry consulting and analysis. “The next 18 to 24 months is the hard work of implementation.”

Integrating the airlines' reservations systems is a big challenge, said Basili Alukos, a Morningstar airline analyst. He said the previous US Airways and America West merger was “one of the worst” integrations in the industry, but that US Airways has likely learned from that experience.

“It seems as if (American-US Airways) has the benefit of history on its side,” Alukos said, adding that the new American can learn from the growing pains of Delta-Northwest and United Continental.

United Continental Holdings made a number of changes following its 2010 merger. As it shifted to a single reservations system and implemented other new processes, United's on-time arrivals suffered and mishandled baggage rates went up. United said in January that customer satisfaction scores were improving.

US Airways Chief Executive Doug Parker, who will head the newly merged company, said his experience with America West was a plus.

“Integrating airlines can be difficult sometimes, but we've (already) done one at US Airways,” he told Reuters. “We know what to do and know what mistakes to avoid.”

Labour integration could also be a challenge for the new American, where union representation issues will need to be resolved.

“The good news is the people they have in the unions now are trying to work with the company,” said Darryl Jenkins, chairman of the American Aviation Institute in Washington. “I think they will be able to get through labour issues reasonably quickly now.”

The tie-up is the fourth major merger in the US airline industry since 2008, when Delta Air Lines bought Northwest. United and Continental merged in 2010, and Southwest Airlines bought discount rival AirTran Holdings in 2011.

The merger could help speed up the recovery of the US airline industry as carriers will have more power to boost fares as yet another competitor is eliminated.

“Wall Street has been enamoured of consolidation from an industry perspective because it will help control capacity,” said George Hamlin, president of Hamlin Transportation Consulting.

Leisure travellers are likely to feel the pinch of higher fares and service cuts more than business passengers.

The tie-up could be a net plus for corporate passengers, who will have to pay higher prices but also will benefit as the three biggest airlines compete to improve their services and networks in hopes of winning more of these lucrative customers.

Competition for the business traveller has already ramped up, especially in key cities such as New York, where Delta has expanded at LaGuardia Airport and is upgrading facilities at John F. Kennedy International Airport to better compete with United's strong presence in Newark, New Jersey.

“The competition for corporate accounts has never been more acute and aggressive,” said Mann.

But US leisure passengers could find bargains harder to come by as the bigger airlines look to sell fewer lower-priced seats, he added.

Morningstar's Alukos said he expects prices to rise overall in wake of the merger. Leisure passengers in larger markets will likely find more flight choices, but those in smaller cities might not be so lucky.

“Those passengers in smaller markets will lose some service or they will have to pay higher rates because there will be fewer flights” as the big airlines continue to curb unprofitable or less-travelled routes, Alukos said.

Still, for US Airways customers, the deal will bring a broader choice of international flight destinations as the combined carrier leverages its membership in the oneworld global alliance. Its members include Asia's Cathay Pacific, Japan Airlines as well as Australia's Qantas.

New routes are expected, particularly in Asia, starting with Dallas-Forth Worth to Seoul later this year, Horton said.

Far from being secret, as most mergers are, the US Airways-American deal is one of the most telegraphed in history. The deal was seen as an inevitability for so long that some labour unions have already struck deals with the two airlines on what will take place following a combination.

The all-stock deal gives creditors of the bankrupt American Airlines parent control of the combined airline, and is subject to approvals from US and European regulators and the US Bankruptcy Court.

At a press conference on Thursday at the Dallas-Forth Worth airport, Parker and AMR CEO Tom Horton said that there would be minimal job losses, mostly at the management level because the two airlines are “complementary”.

Parker said the two airlines share only 12 of 900 routes with American, and that he expects no issues with regulatory authorities. To preserve competition, US antitrust regulators typically require airlines to sell overlapping routes before approving a merger.

The tie-up with American marks a comeback for Parker, 51, perhaps the most vocal proponent of industry consolidation but who repeatedly got passed over as a marriage partner as rivals merged in recent years.

US Air's management team, led by Parker, will assume operational control of the airline, while AMR creditors will wind up owning 72 percent of the combined carrier and take five seats on the 12-member board.

US Airways will have four seats on the board. The remaining seats will be filled by AMR representatives.

Tom Horton, who became AMR's CEO when it filed for bankruptcy, will serve as chairman of the combined airline through the first annual meeting of shareholders, after which Parker will take over.

“It has been the most successful airline restructuring in history, and we had been very focused from the outset on creating the most value for our owners,” Horton told Reuters.

The new combined airline, which will carry the American Airlines name, will be two percent larger than current No. 1 United Continental in terms of traffic - the number of miles flown by paying passengers worldwide, and will be based in Dallas-Fort Worth, Texas.

The new, larger American Airlines would return to the leadership position among US carriers that it ceded in recent years as high labour costs made it difficult to compete with restructured rivals. - Reuters